At one time or another we have all heard that the rich keep getting richer, while the poorer keep getting poorer. this has caused some people to start the “occupy movement”. Although I really don’t want to get involved in the details of what is happening and I honestly have no idea of the details, I think it is also better that we find out what the people who are getting rich legitimately do.
One of the questions we should ask ourselves is, if the rich keep becoming richer, how do they do it? One of the secrets used by the wealthy to create more wealth is to invest their money wisely. When invested wisely, the principle amount invested will grow more money from the interest accrued. May be money can grow on trees?
The interesting thing is that this form of earning money is not just for the rich folks. It is available to each one of us that is willing to put it to work. You can achieve this by depositing your money into accounts that pay compound interest. Let us look at how compound interest works and how it can benefit you and your finances.
First, let us begin look at how basic interest works.
If you are only earning basic interest on your money, it means that interest is only paid on the original amount deposited into your account. In other words, even when interest is applied and the amount in your account grows, the interest paid to you is only applied on the principal – the amount without the interest, if you only earn simple interest. Although this is one way your money can make money for you, its only making money (interest) on the principal amount.
Simple interest sounds good only to those people who don’t know about the other type of interest. There is another kind of interest known as compound interest.
Compound interest is basically interest that is collected on the original amount you deposited plus the interest that has already been applied to that amount. So, whenever interest is applied, the amount of interest is added to the principal for the next time interest is applied. Unlike basic interest that is applied only to the principal, compound interest is applied to the entire amount in the account. This is also known as “compounding.”
Money put in a compound interest account has the potential of growing more than in other types of accounts because you’re earning interest on a greater amount of money each time the interest is applied or let us say, compounded. This is a very smart way to invest your money and watch it grow and even double.
If you want to find out how long it will take your money to double in a compound interest account, you can find out by applying a very simple calculation. Take the interest rate you’re earning on your money and divide it into 72.
For example, if you’re earning four percent interest, you would divide four into 72 and learn that it will take 18 years to double your money. If your money is in an account that pays six percent compound interest, it would take 12 years to double your money.
These examples illustrate how your money will be compounded on an annual basis. Some financial institutions will compound your interest on a more frequent basis, such as quarterly or monthly. Some even compound it daily.
Putting your money in an account that will earn compound interest is a wealth-generating secret you can’t afford to neglect. There is no easier way to increase your wealth than just letting your money sit there and watching it grow.
Its also important to note that this kind of investing is not a “get rich” strategy of building wealth. It requires patience and discipline. Remember that wealth from get-rich-quick schemes quickly disappears; wealth from hard work grows over time – Proverbs 13:11 NLT
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Creating Wealth